The relationship between frequency of financial disclosures and financial performance of companies quoted at the Nairobi Stock Exchange.

Abstract

Stock prices, market liquidity and private information collection are affected when financial disclosure is varied along different dimensions. International Accounting Standard (lAS) number 34 advises companies who file interim reports to conform to certain disclosure requirements; it does not mandate any particular interim reporting frequency. Therefore the question is, does it add value to make frequent financial disclosures in a given year? If so what are the benefits? What are the effects of financial disclosure? The objectives of this study were first to determine whether or not there exists a relationship between frequency of financial disclosure and security returns. Secondly to establish whether or not there exists a relationship between frequency of financial disclosure and volume of shares traded at the Nairobi Stock Exchange (NSE). The main literature sources included a study by Bushee and Noe (2000), in which they found that companies that improved their disclosure practices tend to register increases in their share prices. On the other hand, Lobo and Tung (1997) found that quarterly reporting arouses a lot of investor interest which translates to higher trading volumes in a company's shares. This particular study used data covering a five year period from 2001 to 2005 derived from the NSE. Security returns were determined using the market model on monthly basis. Trading volumes were determined by shares traded divided by outstanding shares for each month. The study revealed that security returns for firms reporting on quarterly basis were higher compared to those of firms reporting semi annually. Trading volumes of firms reporting on quarterly basis were found to be higher compared to trading volumes of the firms reporting semi annually. The study concluded that there exists a strong relationship between frequencies of financial disclosure and trading volume of firms quoted at the NSE. On the other hand, there is a weak relationship between financial disclosure frequency and share returns of companies quoted at the NSE.